Returns Are Gaining Momentum At ENENSYS Technologies (EPA:ALNN6)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at ENENSYS Technologies (EPA:ALNN6) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on ENENSYS Technologies is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.056 = €586k ÷ (€17m - €6.3m) (Based on the trailing twelve months to December 2023).

Thus, ENENSYS Technologies has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 14%.

See our latest analysis for ENENSYS Technologies

In the above chart we have measured ENENSYS Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for ENENSYS Technologies .

What Does the ROCE Trend For ENENSYS Technologies Tell Us?

We're delighted to see that ENENSYS Technologies is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 5.6% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 54% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. ENENSYS Technologies could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 38% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take On ENENSYS Technologies' ROCE

In the end, ENENSYS Technologies has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 62% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we found 2 warning signs for ENENSYS Technologies (1 is potentially serious) you should be aware of.

While ENENSYS Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.